Productivity Problems Of Unionized Firms

August 3, 1998

Companies and industries in which unions have significant power have been steadily declining, and union power has been declining along with them. Less than 10 percent of the private work force is unionized now -- compared to about 27 percent in the early 1950s.

Since unionized workers earn about 15 percent more on average than nonunionized workers, these higher wage costs put unionized businesses at a competitive disadvantage -- which, according to studies, they are generally unable to overcome.

A forthcoming analysis by Kevin Hassett, of the American Enterprise Institute, and Federal Reserve economist Bruce C. Fallick identifies several strategies unionized businesses could pursue to overcome the disadvantage of higher wage costs. But it concludes that the strategies are not really effective.

Theoretically, a unionized company could buy more machines and automate its way to lower production costs.

But unionized companies seldom take this route -- because as the company's profits increase, unions simply escalate their wage demands.

Unionized companies have been accused of acquiring nonunionized firms to get around higher wages and union work rules.

But unionized companies almost always merge with other unionized companies out of fear that unions will spread to a nonunionized acquisition -- thereby prompting a decline in the value of the formerly nonunionized asset.

Proof that unionized businesses usually reject the automation strategy is provided by the fact that firms generally invest about 30 percent less in new machines when their workers are unionized.

Studies show that American workers in recent years have become increasingly less convinced that unions are worthwhile.